Financial Planning

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A financial plan includes everything from defining your goals to executing on them with a budget and an investment plan…and, it’s really never too early to get started!

Financial planning is the process of setting and creating a strategy to achieve your financial goals. Whether you’re planning for short-, medium- or long-term desires, having a financial plan in place makes money decisions easier every step of the way.

The keys to financial security and success are simple to achieve by every American.  The keys involve preparing a simple financial game plan, developing the correct financial mindset and implementing positive financial habits and behaviors…period.

“A ship without a rudder can certainly make its way across the water, but it has no control of where the water will take it–so grab your rudder and take initiative of your financial destiny.” Nancy LaPointe

Creating a game plan is a critical initial step in taking control of your financial future.  A simple financial plan allows you to get control of your financial future.

Financial Planning

Creating a financial plan is about developing a realistic guideline on how you can put all of your financial resources to their best use. The process starts by examining and articulating your short, intermediate and long-term goals and then sorting out your priorities.

A successful financial plan looks at all the interrelated parts of your financial life—income, expenses, discretionary spending, investments, debt, retirement planning, the role of insurance in risk management, income-tax liability, estate planning needs and desires—to make sure they’re all working in sync. This is essential, because if you don’t have a handle on how much money is coming in and going out every month, it’s next to impossible to know how much you can save.

If you don’t have a financial plan, you won’t be able to manage your most important goals like buying that bigger home, paying for your children’s education or funding a comfortable retirement. And if you don’t have adequate insurance, you may not be able to protect these savings in the face of an unexpected event, like an illness or a job loss.

A financial plan will include a series of concrete recommendations to help you achieve the goals that you have identified and prioritized. Without a plan, your financial future remains an undisciplined and low probability of success. The goal of a financial plan, after all, is to make your goals a reality. A financial plan is necessary for money management and financial security because:

  • 78 percent of people with a financial plan pay their bills on time and save each month vs. only 38 percent of people who don’t have a plan
  • 68 percent of planners have an emergency fund while only 26 percent of non-planners are financially prepared to cover an unexpected cost.

Benefits of Having a Financial Plan

Understanding where you stand financially and creating a plan for your financial goals is critical to your financial success. While it’s possible to achieve some financial goals without a financial plan, it’s a lot easier when you have a clear path forward. Having a plan in place serves as helpful guidance when questions of how much to spend and how much to save come up.

Some benefits of personal financial planning are:

  • You’ll better understand your current situation. If you don’t budget or keep track of where your money goes, it’s hard to know what kind of financial shape you’re in. With a financial plan, you’ll always have a pulse on your financial health and know what you’re capable of doing.
  • You’ll have a handle on risk management. Having an emergency fund is essential because you never know when you’ll need it. What’s more, knowing which types of insurance you need—such as health, life and disability—and how much can provide some protection when things go seriously wrong. With a good strategy, you’ll be able to plan for these risk management tools and fit them in your budget.
  • You can eliminate debt faster. If paying off debt is important to you, part of your financial plan can include specific actions you can take to accomplish that goal as fast as possible.
  • You can boost other savings goals. Depending on your goals, you may want to set aside cash for a home down payment, house renovations, a vacation and more. A financial plan can help you map out how you’ll meet each of your savings goals, and give you the motivation to do it.
  • You’ll be ahead on long-term goals. Whether you’re saving for retirement, a vacation or a child’s college education, financial planning can help you understand exactly how much you need to accomplish your goal and what you need to be doing now to get there. The sooner you start this process, the easier it will be to get ahead.

If you’d prefer to build your financial plan on your own, follow these tips:

10 Step Financial Plan

  1. Write down your goals—One of the first things to ask yourself is what you want your money to accomplish. What are your short-term needs? What do you want to accomplish in the next 5 to 10 years? What are you saving for long term? It’s easy to talk about goals in general, but get really specific and write them down. Which goals are most important to you? Identifying and prioritizing your goals will act as a motivator as you dig into your financial details.
    Write down your long-, medium- and short-term goals. Your long-term list might include things like retirement and a child’s education. Medium-term could be the down payment on a house or a new car. A vacation or new computer might fall into the short-term category. Whatever your goals, make them concrete. Then determine a dollar amount for each and the timeframe for reaching it.
  2. Create a net worth statement—Achieving your goals requires understanding where you stand financially today. So start with what you have. First, make a list of all your assets—things like bank and investment accounts, real estate and valuable personal property. Now make a list of all your debts: mortgage, credit cards, student loans—everything. Subtract your liabilities from your assets and you have your net worth. If you’re in the plus, great. If you’re in the minus, you have some work to do. But whatever it is, you can use this number as a benchmark against which you can measure your progress.
  3. Review your cash flow—Cash flow simply means money in (your income) and money out (your expenses). How much money do you earn each month? Be sure to include all sources of income. Now look at what you spend each month, including any expenses that may only come up once or twice a year. Do you consistently overspend? How much are you saving? Do you often have extra cash you could direct toward your goals?
  4. Create a budget and Build an emergency fund—Budget will let you know how you’re spending. Write down your essential expenses such as mortgage, insurance, food, transportation, utilities and loan payments. Don’t forget irregular and periodic big-ticket items such as vehicle repair or replacement costs, out of pocket health care costs and real estate taxes. Then write down nonessentials—restaurants, entertainment, even clothes. Does your income easily cover all of this? Are savings a part of your monthly budget? This will help you determine if what you’re spending money on lines up with what is most important to you. Additionally, build an emergency fund to keep from dipping into long-term investments or borrowing at unattractive rates when you need cash in a hurry, create an emergency savings fund that can cover at least three to six months of essential living expenses such as rent or mortgage, utilities, food, and transportation.
  5. Focus on debt management—Debt can derail you, but not all debt is bad. Some debt, like a mortgage, can work in your favor provided that you’re not overextended. It’s high-interest consumer debt like credit cards that you want to avoid. Try to follow the 28/36 guideline suggesting no more than 28 percent of pre-tax income goes toward home debt, no more than 36 percent toward all debt. Look at each specific debt to decide when and how you’ll systematically pay it down.
  6. Get your retirement savings on track—Whatever your age, retirement saving needs to be part of your financial plan. The earlier you start, the less you’ll likely have to save each year. You might be surprised by just how much you’ll need—especially when you factor in healthcare costs. But if you begin saving early, you may be surprised to find that even a little bit over time can make a big difference. Calculate how much you will need and contribute to a 401(k) or other employer-sponsored plan (at least enough to capture an employer match) or an IRA. Save what you can and gradually try and increase your savings rate as your earnings increase. Whatever you do, don’t put it off.
  7. Check in with your portfolio—If you’re an investor, you should take a close look at your portfolio? (And if you’re not an investor, think carefully about becoming one!) Market ups and downs can have a real effect on the relative percentage of stocks and bonds you own—even when you do nothing. And even an up market can throw your portfolio out of alignment with your feelings about risk. Don’t be complacent. Review and rebalance on at least an annual basis.
  8. Make sure you have the right insurance—Having adequate insurance is an important part of protecting your finances. We all need health insurance, and most of us also need car and homeowner’s or renter’s insurance. While you’re working, disability insurance helps protect your future earnings and ability to save. You might also want a supplemental umbrella policy based on your occupation and net worth. Finally, you should consider life insurance, especially if you have dependents. Review your policies to make sure you have the right type and amount of coverage.
  9. Know your tax situation—The Tax Jobs and Cuts Act of 2017 changed a number of deductions, credits and tax rates beginning in 2018. For instance, standard deductions were increased significantly, eliminating the need to itemize for a lot of people. To make sure you’re prepared for the 2019 tax season, review your withholding, estimated taxes and any tax credits you may have qualified for in the past. The IRS has provided tips and information at https://www.irs.gov/tax-reform. Taking advantage of tax sheltered accounts like IRAs and 401(k)s can help you save money on taxes. You may also want to check in with your accountant for specific tax advice.
  10. Create or update your estate plan—At the minimum, have a will—especially to name a guardian for minor children. Also check that beneficiaries on your retirement accounts and insurance policies are up-to-date. Complete an advance healthcare directive and assign powers of attorney for both finances and healthcare. Medical directive forms are sometimes available online or from your doctor or hospital. Working with an estate planning attorney is recommended to help you plan for complex situations and if you need more help.

Financial planning can improve your chances of achieving your financial goals and financial freedom. While financial freedom can mean different things to different people, it generally means having a feeling of security and empowerment with your money and life.

References:

  1. https://www.schwab.com/resource-center/insights/content/10-steps-to-diy-financial-plan
  2. https://www.westernsouthern.com/learn/financial-education/financial-planning-checklist
  3. https://www.schwab.com/resource-center/insights/content/case-financial-planning
  4. https://www.experian.com/blogs/ask-experian/what-is-financial-planning/

True Cost of Credit Cards

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Credit cards make buying things easy, but at a significant cost

Credit cards provide security, convenience, and even rewards based on spending. However, if cardholders don’t manage their cards carefully, they may find themselves facing unwanted consequences like a poor credit score or hidden fees.

If you don’t pay off your credit card balance every month, the interest assessed on your account means you may be paying more than you expect. And if you spend beyond your means, the resulting interest and debt can become significant.

Pros and Cons of Credit Cards

To make the most of your credit cards and maintain a great credit score, it’s essential to understand their pros and cons. Maximize the benefits and minimize unnecessary costs by learning about the advantages and disadvantages of credit.

Advantages

  • Instant Purchasing Power – Credit can help with unexpected emergency expenses and give you the flexibility to pay them over time.
  • Security – Lose cash, and it’s gone. Lose a credit card, and it can be canceled with no harm done in most circumstances. Also, you need to be prompt about reporting a lost or stolen card to be protected against its unauthorized use.
  • Record Keeping – Your credit card statement is an itemized list of your monthly expenditures, which can be helpful when it comes to budgeting.
  • Convenience – Credit cards are more widely accepted as a form of payment than checks, and they’re generally faster to use.
  • Bill Consolidation – Bills can be paid automatically via credit card, consolidating several payments into a single sum.
  • Rewards – Using a credit card with a rewards program may earn you benefits like free travel.

Disadvantages

  • The main disadvantage to credit card usage is the potential cost in interest and fees. Wise use of credit means understanding those costs and acting accordingly. Keep track of your spending to ensure that you can repay your credit card bill in full when it is due each month.

It’s important to understand the true cost of credit cards when interest and fees are factored in. Using credit may be less convenient if it means paying more for purchases over time when interest is factored in.

Payment by credit card is quite different from the cash payment methods like cash, check, or debit card. With credit, a promise to pay later is a part of the transaction. With credit cards, credit is provided by a third party (someone other than the seller), the seller receives full payment for the item. The seller must pay money back to the third party who provided the credit. In this way, the person receiving the credit is delaying payment.

Many people use credit to pay for meals at restaurants, even to make small purchases without having to use cash. Because the use of credit is so common, it might appear that credit is unlimited. However, people who do obtain credit are subject to credit limits, meaning that they can only get so much credit.

Get to know these credit cards terms:

  1. Annual Fee – The once-a-year cost of owning a credit card. Some credit card providers offer cards with no annual fees.
  2. Annual Percentage Rate (APR) – The yearly interest rate charged on outstanding credit card balances.
  3. Balance – An amount of money. In personal banking, balance refers to the amount of money in a savings or checking account. In credit, balance refers to the amount of money owed.
  4. Credit Line – The maximum dollar amount that can be charged on a specific credit card account.
  5. Grace Period – The period of time after a payment deadline when the borrower can pay back the borrowed money without incurring interest or a late fee.
  6. Introductory Rate – An interest rate offered by credit card issuers in the initial stages of a loan. These rates are often set much lower than standard rates in order to attract new cardholders. Make sure you know how long the introductory rate will last and what the standard interest rate will be once the introductory period ends.
  7. Minimum Payment – The minimum amount of money that you are required to pay on your credit card statement each month in order to keep the account in good standing.
  8. Overdraft Protection – A banking service that allows you to link your checking account to your credit card, thereby protecting you from overdraft penalties or bounced checks in the case of insufficient funds.

Credit cards can be a convenient and flexible form of payment, but they have to be used responsibly in order to make the most of your money. Though credit cards allow you to purchase items instantly without using cash, it’s important to use your cards as carefully as you would handle your cash.

References:

  1. https://www.practicalmoneyskills.com/learn/credit/credit_basics
  2. https://www.econedlink.org/resources/the-costs-of-credit
  3. https://www.thebalance.com/the-true-cost-of-credit-cards-1289627
  4. https://www.practicalmoneyskills.com/learn

Summary of “Four Pillars of the New Retirement” | Edward Jones and New Wave

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“Retirement is a time to relaunch, reengage and reinvent. It’s about doing things and giving back in ways that you weren’t able to do in the previous decades of your life.” – Kerry Hannon, Author of Never Too Old to Get Rich

Key insights from “Four Pillars of the New Retirement”, by Edward Jones and New Wave include:

  • Nine in ten Americans feel that there should be more ways for retirees to use their talents and knowledge for the benefit of their communities and society at large
  • Almost 70% of those who plan to retire in the next 10 years say they have no idea what their healthcare and long-term care costs will be in retirement
  • Twenty-four million Americans have provided financial support to adult children due to the COVID-19 pandemic
  • Seventy-one percent of retirees are willing to provide financial support even if it jeopardizes their own financial future
  • Alzheimer’s and mental decline are the most feared health conditions of later life among retirees, ranking higher than COVID-19, cancer, heart attack and stroke

The new retirement is becoming an exciting and fulfilling stage of life—full of new choices, new freedoms and new challenges. The timing, shape and meaning of retirement are transforming. Once viewed as a time to wind down, retirement is increasingly a time of new choices, new freedoms, new purpose and new challenges. Recent research continues to reveal that, more than ever before, retirement is far more than a destination or an end point; it’s the beginning of a new journey filled with new twists and turns as well as new possibilities and new questions.

What makes today’s retirement “new”? Increasing longevity means more people with longer retirements—making retirement a more important stage of life. Two-thirds of all the people who have ever lived past the age of 65 in the entire history of the world are alive today, according to the information calculated by Age Wave in 2016.

Four Pillars of Retirement

There are four areas (dubbed the Four Pillars) that impact the quality of life in retirement: health, emotional well-being, purpose and finances. Achieving your ideal retirement requires thought and action about each of these pillars, according to Edward Jones.

All working people, especially pre-retirees, need to understand that the quality of their lives in retirement is rooted in what they do to improve their health, their relationships with family and friends, their sense of purpose, and their finances long before they retire. Then, in retirement, they must continue to learn how to improve and integrate the four pillars.

While in previous past decades, retirement often focused on the end of work and winding down.  However, today’s retirees see themselves as having more freedom – freedom from many work and family responsibilities, and freedom to explore new options and pursue new interests such as travel and hobbies.

All four pillars are essential. Each plays a significant role in the overall well-being of retirees. Those who report having higher quality of life also grade themselves higher in terms of health, family relationships, sense of purpose and finances. And those reporting lower quality of life grade themselves lower in each of the four pillars. Individually and collectively, these four pillars enable people to thrive in the new retirement.

Pillar 1: Health

“Many Americans view retirement as a time to improve their health—in mind, body and spirit”…and, “it’s never too late to improve your health.”

Health influences all facets of life in the new retirement: where retirees live, whether and how they can work, how they spend their leisure, how much they can enjoy themselves and their families, and how much they can volunteer or take part in activities that give them a sense of purpose. Being healthy can also help protect retirement savings from the rising out of-pocket costs of health care and long-term care.

Part of what’s new about retirement is a longer lifespan and more years in this life stage. Good health offers choices. Unfortunately, most adults spend 10 years in poor health. The most feared condition in America is Alzheimer’s and other forms of dementia.

90% of Americans older than 50 say that being healthy is about being able to do the things you want.

Physical health naturally declines with age, but research shows that mental health psychological and emotional—actually rises. Overall, our health-spans do not match our lifespans, with older Americans living an average of 10 years in poor health. And cognitive or “brain” health is of supreme importance and worry for retirees. Alzheimer’s and other forms of dementia are the conditions they fear the most—more than cancer, a heart attack, or even infectious diseases like COVID-19.

Pillar 2: Emotional Well-Being

“Positive, meaningful and supportive relationships with friends and family are critical to health and quality of life in retirement.” Linda Fried, MD, MPH, Dean of the Mailman School of Public Health at Columbia University

Retirees consistently say family and friends are their greatest source of satisfaction, support, joy, and even purpose. Spending time with family— often grandchildren in particular—is always high on the retirement agenda. Families today are becoming more connected and interdependent, and the COVID-19 pandemic is bringing them closer still.

On the one hand, adults 50+ worry about becoming a burden on their families and friends. On the other hand, they are willing to offer financial support to family regardless of how it affects their future.

72% of retirees say being a burden to their family is one of their top fears, but one in four Americans older than 65 have not discussed their end-of-life care preferences with anyone at all.

Most retirees draw their greatest nourishment from family relationships. And for most Americans today, family extends beyond blood relatives to include “families of affinity.” Generational generosity is the rule, with retirees willing to do whatever it takes, personally and financially, to support family members in need, even when it means sacrificing their own financial security. Retirees without close connections to family and friends face greater risk of physical and social isolation.

Pillar 3: Purpose

“Purpose is feeling like the world needs you as much as you need it, that you have something to contribute and that you still matter.”

Purpose is inextricably linked with the other pillars, especially family and health. Retirees with a strong sense of purpose are happier and healthier, more active and more socially engaged, and they live longer.19 They have positive attitudes toward their own aging and life itself. They reject the ageist myth that retirement means a life in decline, instead making retirement the most meaningful and fulfilling time of their lives. They want to feel useful more than youthful. Retirees say their greatest source of purpose is from spending time with loved ones. They also value learning and growing. Yet now, with more than seven hours a day of free time, one in three new retirees struggles to find purpose in retirement.

89% of Americans feel there should be more ways for retirees to use their talents and knowledge for the benefit of others.

Retirees with a strong sense of purpose are happier, healthier and live longer. They report deriving their strongest sense of purpose from spending time with loved ones. They also face a new challenge and opportunity: how to use their newfound “time affluence.” They don’t just want to keep busy; they want to spend their time in useful and rewarding ways. And a striking 89% of all Americans agree that there should be more ways for retirees to help in their communities

Pillar 4: Finances

“Financial planning is about much more than money. It’s how you want the money to work for you, and what is most important for your life.” Dori Mintzer, Retirement Coach, Author and Speaker

The word “wealth” derives from the Middle English word “wele” for “overall well-being.” That’s a great reminder of the fundamental role of finances in people’s lives. For retirees, money isn’t an end in itself, but an essential means to the end of achieving wellbeing in retirement. Nearly half of retirees (46%) say the primary purpose of money in their lives is to provide security for the unexpected.

The role of money in retirement is to provide security and freedom. Over half of retirees wish they had budgeted more for unexpected expenses. When it comes to the unexpected, the cost of health care is more worrisome than a recession.

Two-thirds of Americans who plan to retire in the next 10 years say they have no idea what their health and long-term care costs will be in retirement.1

The financial goal of the vast majority of retirees is not to accumulate wealth in itself, but to have sufficient resources and cash flow to provide security and the freedom to live the lives they want. Many retirees find that managing money in retirement can be even more challenging than saving for it. Even in today’s volatile market, retirees’ greatest financial worry is the cost of health care and long-term care. The key to financial preparation is looking holistically at how one wants to live in retirement, not just how much money may be needed.

These four pillars are inextricably interconnected. Social relationships and sense of purpose can dramatically impact health. The greatest source of purpose comes from spending time with family. Retirees commonly support adult children and other family members financially — or are supported in return. Healthcare costs are a financial worry, and financial stress can negatively impact health. Sound health and finances enable retirees to engage in the relationships and purposeful activities they value most. The list of interconnections goes on. Each pillar influences the others, and together they are mutually reinforcing.

Takeaways

There are valuable lessons that can make for a better life in retirement. Research by Edward Jones and New Wave shows that there are four key ingredients—four pillars—to living well in the new retirement: health, family, purpose and finances. They are highly intertwined, and must be viewed and addressed holistically. They also change in retirement, so retirees need to continually recalibrate and adjust.

Retirees with higher quality of life more often view retirement not as a time to rest, as more of the same, or as the beginning of the end, but as an exciting new chapter in life. They don’t think of retirement as a destination, but a journey. They start imagining, planning for, even practicing retirement activities in advance of declaring themselves retired.

References:

  1. https://www.edwardjones.com/us-en/market-news-insights/retirement/new-retirement
  2. https://www.edwardjones.com/sites/default/files/acquiadam/2021-01/Edward-Jones-4-Pillars-US-report.pdf
  3. https://agewave.com/the-four-pillars-of-the-new-retirement/
  4. https://www.edwardjones.com/us-en/market-news-insights/wellness

Road to Wealth | American Association of Individual Investors (AAII)

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You can build wealth by saving for the future and investing over a long term. The earlier you start, the easier it is for your money to work for you through compounding. 

Building wealth is essential to accomplish a variety of goals, from sending your kids to college to retiring in style. Wealth is what you accumulate; not what you spend. Most Americans are not wealthy. and few have accumulated significant assets and wealth.

How long could the average household survive without a steady income.

Every successful saving and investing journey starts with a set of clear and concise goals, whether they’re as big as retirement or as small as wanting to save for new tires for your vehicle. It’s important to determine and write down what are your savings, investing and wealth building goals.

Rather than trying to guess what’s going to happen, focus on what you can control. Each financial goal calls for a positive step you can take no matter what the market or the economy is doing.

The Wealth-Building Process can help you keep many of these financial goals and investing process on track. It is designed to give you clarity on what you are investing for and what steps you need to take to reach and fulfill those goals.

The key is to stick to your financial plan and recalibrate the investing process throughout the year. One way to do so is to set up reminders that prompt you to go back and review your goals. Positive change often requires a willingness to put yourself back on track whenever you drift away from the plan.

With that in mind, here are financial and investing tactics for investors:

1. Only follow strategies you can stick with no matter how good or bad market conditions are.  All too often, investors misperceive the optimal strategy as being the one with the highest return (and often the one with the highest recent returns). This is a big mistake; if you can’t stick to the strategy, then it’s not optimal for you. Better long-term results come to those investors who can stick with a good long-term strategy in all market environments rather than chasing the hot strategy only to abandon it when market conditions change.

One way to tell if your strategy is optimal is to look at the portfolio actions you took this past year. Make sure that you are not taking on more risk than you can actually tolerate. Alternatively, you may need to develop more clearly defined rules about when you will make changes to your portfolio.

2. Focus on your process, not on your goals. Mr. Market couldn’t care less about how much you need to fund retirement, pay for a child’s college education or fulfill a different financial goal you may have. He does as he pleases. The only thing you can control is your process for allocating your portfolio, choosing investments to buy and determining when it’s time to sell. Focus on getting the process right for these three things and you will get the best possible return relative to the returns of the financial markets and your personal tolerance for risk.

3. Write down the reasons you are buying an investment. One of the most fundamental rules of investing is to sell a security when the reasons you bought it no longer apply. Review your current holdings and ask yourself the exact reasons you bought them. Recommend you maintain notes, so you don’t have to rely on your memory to cite the exact characteristics of a stock or a fund that attracted you to the investment.

4. Write down the reasons you would sell the investments you own. Just as you should write down the reasons you bought an investment, jot down the reasons you would sell an investment, ideally before you buy it. Economic conditions and business attributes change over time, so even long-term holdings may overstay their welcome. A preset list of criteria for selling a stock, bond or fund can be particularly helpful in identifying when a negative trend has emerged.

5. Have a set schedule for reviewing your portfolio holdings.  If you own individual securities, consider reviewing the headlines and other relevant criteria weekly. (Daily can work, if doing so won’t cause you to trade too frequently.) If you own mutual funds, exchange-traded funds (ETFs) or bonds, monitor them quarterly or monthly.

6. Rebalance your portfolio back to your allocation targets. Check your portfolio allocations and adjust them if they are off target. For example, if your strategy calls for holding 40% large-cap stocks, 30% small-cap stocks and 30% bonds, but your portfolio is now composed of 45% large-cap stocks, 35% small-cap stocks and 20% bonds, adjust it. Move 5% of your portfolio out of large-cap stocks, move 5% out of small-cap stocks and put the money into bonds to bring your allocation back to 40%/30%/30%. How often should you rebalance? Vanguard suggests rebalancing annually or semiannually when your allocations are off target by five percentage points or more.

7. Review your investment expenses. Every dollar you spend on fees is an extra dollar you need to earn in investment performance just to break even. Higher expenses can be justified if you receive enough value for them. An example would be a financial adviser who keeps you on track to reach your financial goals. Review your expenses annually.

8. Automate when possible. A good way to avoid unintentional and behavioral errors is to automate certain investment actions. Contributions to savings, retirement and brokerage accounts can be directly taken from your paycheck or from your checking account. (If the latter, have the money pulled on the same day you get paid or the following business day.) Most mutual funds will automatically invest the contributions for you. Required minimum distributions (RMDs) can be automated to avoid missing deadlines and provide a monthly stream of income. You can also have bills set up to be paid automatically to avoid incurring late fees.

9. Create and use a checklist. An easy way to ensure you are following all of your investing rules is to have a checklist. It will both take the emotions out of your decisions and ensure you’re not overlooking something important.

10. Write and maintain emergency instructions on how to manage your portfolio. Typically, one person in a household pays the bills and manages the portfolio. If that person is you and something suddenly happened to you, how easy would it be for your spouse or one of your children to step in and take care of your financial affairs? For many families, the answer is ‘not easily’ given the probable level of stress in addition to their lack of familiarity with your accounts. A written plan better equips them to manage your finances in the manner you would like them to. It’s also a good idea to contact all of your financial institutions and give them a trusted contact they can reach out to, if needed.

Even Warren Buffett sees the value of this resolution. In his 2013 Berkshire Hathaway shareholder letter, he wrote, “What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit … My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund.” Considering the probability of Mrs. Buffett having learned a thing or two about investing over the years, it speaks volumes that Warren Buffett still sees the importance of including simple and easy-to-follow instructions in his estate documents.

11. Share your insights about investing with your family.  If you’re reading this, you likely have some passion for, or at least interest in, investing. Share it with your family members by having a conversation with them. Talk about how you invest, what you’ve learned and even the mistakes you’ve made. It’s a great way to pass along a legacy to those younger than you and to maintain a strong bond with those older than you. You might even learn something new by doing so. Our Wealth-Building Process can provide a great framework for facilitating these types of conversations.

If a family member isn’t ready to talk, don’t push them. Rather, write down what you want to say, give the letter to them and tell them you’ll be ready to talk when they are. For those of you who are older and are seeking topics that your younger relatives (e.g., millennials) might be interested in, consider our discount broker guide, which includes a comparison of the traditional online brokers versus the newer micro-investing apps.

12. Check your beneficiary designations. It is critical that all of your beneficiary designations are current and correctly listed. Even if nothing has changed over the past year, ensure that the designations on all of your accounts are correct. Also, make sure your beneficiaries know the accounts and policies they are listed on. Finally, be certain that those you would depend on to take over your financial affairs have access to the documents they need in the event of an emergency. We think this step is so important that we included a checklist for it in our Wealth-Building Process toolkit.

While you are in the process of checking your beneficiaries, contact all of the financial institutions you have an account or policy with to ensure your contact information is correct.

13. Be disciplined, not dogmatic. When you come across information that contradicts your views, do not automatically assume it is wrong. The information may highlight risks you have not previously considered or that you have downplayed in the past. At the same time, don’t be quick to change your investing style just because you hear of a strategy or an approach that is different than yours. Part of investing success comes from being open to new ideas while maintaining the ability to stick with a rational strategy based on historical facts. When in doubt, remember resolution #1, only follow strategies you can stick with no matter how good or bad market conditions are.

14. Never panic. Whenever stocks incur a correction (a decline of 10%–20%) or fall into bear market territory (a drop of 20% or more), the temptation to sell becomes more intense. Our brains are programmed to disdain losses as well as to react first and think later.

This focus on the short term causes us to ignore the lessons of history. Market history shows a pattern of rewards for those who endure the bouts of short-term volatility. We saw this last year. The coronavirus bear market was sharp, and the drop was quick. Those who were steadfast—or used it as an opportunity to add to their equity positions—were rewarded with new record highs being set late in the year and so far this year.

Drops happen regularly and so do recoveries. If you sell in the midst of a correction or a bear market, you will lock in your losses. If you don’t immediately buy when the market rebounds—and people who panic during bad market conditions wait too long to get back in—you will also miss out on big gains, compounding the damage to your portfolio. Bluntly put, panicking results in a large and lasting forfeiture of wealth.

15. Don’t make a big mistake.  Things are going to go haywire. A stock you bought will suddenly plunge in value. A mutual fund strategy will hit the skids. A bond issuer will receive a big credit downgrade. The market will drop at the most inopportune time.

If you are properly diversified, don’t make big bets on uncertain outcomes (including how President-elect Biden’s administration and the Democrats’ control of Congress will impact the financial markets), avoid constantly chasing the hot investment or hot strategy and set up obstacles to prevent your emotions from driving your investment decisions, you will have better long-term results than a large number of investors.

16. Take advantage of being an individual investor. Perhaps the greatest benefit of being an individual investor is the flexibility you are afforded. As AAII founder James Cloonan wrote: “The individual investor has a distinct advantage over the institution in terms of flexibility. They can move more quickly, have a wider range of opportunities and can tailor their program more effectively. They have only themselves to answer to.”

Not only are we as individual investors not restricted by market capitalization or investment style, but we also never have to report quarterly or annual performance. This means we can invest in a completely different manner than institutional investors can. Take advantage of this flexibility, because doing so gives you more opportunity to achieve your financial goals.

17. Treat investing as a business. The primary reason you are investing is to create or preserve wealth, and no one cares more about your personal financial situation than you do. So be proactive. Do your research before buying a security or fund, ask questions of your adviser and be prepared to sell any investment at any given time if your reasons for selling so dictate.

18. Alter your passwords and use anti-virus software. There continues to be news stories about hacks. The best way you can protect yourself is to vary your passwords and use security software. A password manager is helpful for this. Anti-virus software and firewalls can keep viruses off of your computer and help thwart hackers.

19. Protect your identity. Identity theft can cause significant problems. Freezing your credit, monitoring your credit reports (Consumer Reports recommends AnnualCreditReport) and paying your taxes as early as possible can help prevent you from becoming a victim. Promptly challenge any suspicious charges on your credit card or telephone bills. If you get an unsolicited call asking for personal information, such as your Social Security number, or from someone claiming to be an IRS agent, hang up. (Better yet, don’t answer the phone unless you are certain you know who is calling.) It’s also a good idea to cover the keypad when typing your passcode into an ATM. Never click on a link in an email purporting to be from a financial institution (a bank, a brokerage firm, an insurance company, etc.). Instead, type the company’s website address directly into your browser.

The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 required credit bureaus to allow consumers to freeze their credit reports at no cost. The following links will go directly to the relevant pages on each credit bureau’s website:

  • Equifax: www.equifax.com/personal/credit-report-services
  • Experian: www.experian.com/freeze/center.html
  • TransUnion: www.transunion.com/credit-freeze

20. To help others, invest in yourself first. Investing based on your values, donating to charity, devoting your time to causes you are passionate about and giving to family and friends are all noble actions and goals. To do so now and in the future requires taking care of yourself. Keep yourself on a path to being financially sound through regular saving and controlled spending. Good sleep habits, exercise and following a healthy diet (eat your vegetables!) are also important—as are continuing to wear a face mask and practicing social distancing. The better shape you keep yourself in from a physical, mental and financial standpoint, the more you’ll be able to give back to society.

For those of you seeking to follow an ESG strategy, be it due to environmental, social or governance issues, make sure you stay on a path to achieve financial freedom. The same applies to other values-based investing, such as following religious beliefs. While it is possible to do well by doing good, every restriction you place on what you’ll invest in reduces the universe of potential investments you will have to choose from.

21. Be a mindful investor. Slow down and carefully consider each investment choice before making a decision. Ensure that the transaction you are about to enter makes sense given your investing time horizon, which may be 30 years or longer, and that it makes sense given your buy and sell rules. A common trap that investors fall into is to let short-term events impact decisions that should be long-term in nature. If you think through your decision process, you may well find yourself making fewer, but smarter, investment decisions.

22. Take a deep breath. Often, the best investing action is to simply take a deep breath and gather your composure. Short-term volatility can fray anyone’s nerves, but successful investors don’t let emotions drive their trading decisions. It’s okay to be scared; it’s not okay to make decisions that could impact your portfolio’s long-term performance based on short-term market moves. If you find yourself becoming nervous, tune out the investment media until you get back into a calm state of mind and then focus on resolutions #1, #2, #3 and #4 (found in last week’s Investor Update). Success comes from being disciplined enough to focus on your strategy and goals and not on what others think you should do.

“I found the road to wealth when I decided that part of all I earned was mine to keep. And so will you.”  The Richest Man in Babylon

Finally, remember that you have a life outside of the financial markets. Investing is merely a means to an end. Put the majority of your energy into activities you truly enjoy, including spending time with family and friends.

References:

  1. https://www.aaii.com/learnandplan/aboutiiwbp
  2. https://www.forbes.com/sites/jrose/2019/09/26/ways-to-build-wealth-fast-that-your-financial-advisor-wont-tell-you

Mindset is EVERYTHING!

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“In the fixed mindset, everything is about the outcome. If you fail—or if you’re not the best—it’s all been wasted. The growth mindset allows people to value what they’re doing regardless of the outcome. They’re tackling problems, charting new courses, working on important issues. Maybe they haven’t found the cure for cancer, but the search was deeply meaningful.”  Carol S. Dweck, Mindset: The New Psychology of Success

According to wealth coach Derek Moneyberg, your mindsets and habits determine your success. It is extremely important to align your mindset to reflect your goals and vision. “If you have big goals, your mindsets need to align with that ambition,” Moneyberg said.

Sounds simple, but according to Moneyberg, it is simple, but not easy. Consciously understanding what you need to do versus actually doing it are two very different things.

Moreover, Moneyberg opined that, “mindset is the difference maker. Your mindset is the operating system on which your daily habits run…you need to program your computer’s operating system. Your mindset is no different. You must program it correctly, so you have the relentless discipline to focus and execute for the years it takes to realize your big goals.”

Changing financial mindset is a necessary step to take if you really want to improve your financial position this year. A shift in your mindset will allow you to take control of your life and finances.

Growth Mindset
Source: Money Hacker

 

“You’ve got to win in your mind before you win in your life.” – John Addison

 

“Feed your mind just as you do your body. Feed it with good ideas, wherever they can be found. Always be on the lookout for a good idea; a business idea, a product idea, a service idea, an idea for personal improvement. Every new idea will help to refine your philosophy. Your philosophy will guide your life, and your life will unfold with distinction and pleasure.” – Jim Rohn

 

“It’s a funny thing about life, once you begin to take note of the things you are grateful for, you begin to lose sight of the things that you lack.” – Germany Kent

References:

  1. https://www.usatoday.com/story/sponsor-story/derek-moneyberg/2021/03/25/how-eliminate-5-mindsets-poison-opportunities-peak-success/6985924002/
  2. https://yourpositiveoasis.com/25-mindset-quotes-change-your-thinking/

Paying Yourself First

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“Don’t save what is left after spending; spend what is left after saving.” Warren Buffett

Automated saving and ‘paying yourself first’ are probably the top two things Americans can do to create wealth and financial security. Paying yourself first is often referred to as “the golden rule of personal finance.” Paying yourself first means saving before you do anything else with your paycheck, like paying bills, buying groceries, or shopping. You allocate a percentage of your pay or income to a savings or investment account. Paying yourself first prioritizes savings and investing, but not at the expense of necessary expenses like housing, utilities and insurance.

Too many people try to save in a way that’s exactly backward. They spend first and then attempt to save what left at the end of the month or save up toward the end of the year.

The far more powerful way to save and invest is to set aside a percentage of your income every pay period — recommended 15% to 20% or more — and to save and invest it automatically.

Accumulating Wealth

Most of the folks who have accumulated wealth got there by systematically socking away a reasonable percentage of their pay into a broad array of stocks and keep doing it for decades.

The key take-aways are to make your savings an automatic deposit so you don’t get a chance to change your mind and spend it. And, spend what’s left and you’re certain to be on the right path to build wealth for tomorrow. Additionally, don’t forget to invest it!

By saving first, you eliminate the problem of not having enough money to save at the end of the month. Setting up automatic deposit into savings or brokerage accounts, you can secure your financial future and build wealth.

“Why would you wake up in the morning, leave your family, not do what you want with your day, go to work all day long for 8, 9, 10 hours a day, commute back home, get up and do it all over again? Why would you do this 5 days a week, 4 weeks out of the month, 12 months out of the year? Why would you do all that to earn money and not pay yourself first?

Most people pay everyone else before themselves: the government, their creditors, and their bill collectors. Everybody else gets paid first and then if anything’s left over, then they pay themselves.

That system stinks and is designed for you to fail financially. If that’s the system you’re using right now, and you don’t have money, that’s why. The odds are set up against you. It’s too tough for you to get rich if you’re paying everybody else first. You need to change this.

You need to completely redirect your income so the first person who gets paid is you.” David Bach, The Automatic Millionaire

Prioritize savings

If you deposit money directly into savings or brokerage account every time you get paid, you may be less likely to spend it on your everyday expenses. Following this system can help you foster a habit of saving that will add up over time and help you be prepared for retirement or unexpected expenses.

A good target is to save 10 – 15% of your take-home pay and put it toward your savings and investment goals. Saving even $125 or $150 a month is one small step you can take to help you get into the habit.

“The first bill you pay each month should be to yourself.”

By paying yourself first, you make saving a top priority. You make it a priority to pay your savings and investment accounts first, before making the first monthly payment or paying the first bill.

Most people say they don’t save enough money for retirement, or invest enough, or save a big enough emergency fund, because they don’t have the money to save more. That’s why personal finance advice says that you should pay into those savings and brokerage accounts first. Treat it like a bill. Approach it the same way that you treat your phone bill or your electric bill.

Most people wait and only save what’s left over after paying bills or spending on other discretionary items—that’s paying yourself last. Conversely, before you pay your bills, before you buy groceries, before you do anything else, set aside a portion of your income to save. Put the money into your 401(k), your Roth IRA, or your savings account.

Automate Your Savings

A quick way to begin paying yourself first is by setting up an automatic transfer to a savings or retirement account every time you receive a direct deposit, like a paycheck.

Most people wait and only save what’s left over after paying bills or spending on other discretionary items—that’s paying yourself last. Conversely, before you pay your bills, before you buy groceries, before you do anything else, set aside a portion of your income to save. Put the money into your 401(k), your Roth IRA, or your savings account.

Paying yourself first makes saving money and investing in assets a priority without sacrificing other financial needs and obligations. No matter what your level of earning or responsibilities are, you can afford to pay yourself first with a few small changes.

Most people wait and only save what’s left over after paying bills or spending on other discretionary items—that’s paying yourself last. Conversely, before you pay your bills, before you buy groceries, before you do anything else, set aside a portion of your income to save. Put the money into your 401(k), your Roth IRA, or your savings account.

Most people wait and only save what’s left over after paying bills or spending on other discretionary items—that’s paying yourself last. Conversely, before you pay your bills, before you buy groceries, before you do anything else, set aside a portion of your income to save. Put the money into your 401(k), your Roth IRA, or your savings account.

Most people wait and only save what’s left over after paying bills or spending on other discretionary items—that’s paying yourself last. Conversely, before you pay your bills, before you buy groceries, before you do anything else, set aside a portion of your income to save. Put the money into your 401(k), your Roth IRA, or your savings account.

Most people wait and only save what’s left over after paying bills or spending on other discretionary items—that’s paying yourself last. Conversely, before you pay your bills, before you buy groceries, before you do anything else, set aside a portion of your income to save. Put the money into your 401(k), your Roth IRA, or your savings account.

“Paying yourself first should really be called investing in yourself first.”

Source:

  1. https://www.marketwatch.com/story/the-huge-financial-force-even-albert-einstein-missed-2019-12-10

Star Wars Day — May the Fourth (Force) Be With You

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“A long time ago in a galaxy far, far away…”

May 4th was adopted by Star Wars fans as a day to celebrate the movies. It was chosen for its pun on “May the Force be with you,” i.e. “May the Fourth be with you.”

The original Star Wars movie, written and directed by George Lucas, was released in theaters in the U.S. on May 25, 1977, Memorial Day Weekend.

Understanding the Emotions of Investing | Edward Jones

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“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.” – Peter Lynch

No one can control the economy, the stock market or exactly know how an investment will perform in the short term. And that lack of control and certainly can lead to making poor (and many times, emotional) investing decisions – like chasing performance, not diversifying, or trying to time the market by moving into and out of the market (often at the wrong time).

While these reactions can be triggered by a desire to avoid risks (defined for our purposes as loss of capital), the results of these behaviors can pose the greatest risk of all — not reaching your long-term goals. In fact, the biggest risk may not be market fluctuations themselves; it’s our emotional reaction to these fluctuations and market volatility. That’s why it’s so important to have a financial advisor in your corner, helping you stay committed to your long term investment strategy.

Here are some common emotional investing behaviors that may derail your journey to reaching your long-term financial goals. By understanding the pitfalls of these behaviors, you can prevent making these investing mistakes in the future.

1. Heading to (or staying on) the sidelines

We’ve all seen the headlines: the economy’s slow recovery, the government’s budget deficit, market volatility. Prompted by what they perceive as bad news, some investors may try to “time the market” or sell investments just because of what they hear in the news – to move to the sidelines (and perceived safety) and wait until things get better. But it’s nearly impossible to correctly ‘time’ the market (predict when to get out and even more difficult to decide when to get back in), which often results in missing the best days – thereby severely affecting your performance And often, waiting until things get better means selling when prices are down and then buying back in when prices are higher – not a recipe for long-term success.

Other investors hold in too much cash because they want to avoid market risk. But not investing could actually increase your risk because you may not have enough growth in your portfolio to meet your short and long term financial goals or offset inflation (and loss of purchasing power).

2. Stay in the game and stay invested

Keep your focus on your long-term financial goals rather than on the ever-changing headlines, which could focus too much on the negative for dramatic effect.

If you begin to feel overwhelmed, talk with your financial advisor about your attitude toward risk and observe how you react to specific events. That way, you can work together to refine your goals and investment strategy, if needed.

3. Chasing performance

When the media raves about the latest “hot” investment or highlights “dramatic” declines in the market, some investors are tempted to chase the winners and sell the losers. This type of emotional response could be a recipe for underperformance because it results in buying high and selling low – not the recipe for a successful investment strategy.

4. Stay diversified

Having a diversified set of investments is more important than trying to find the next “hot” investment. When you have a portfolio made up of a variety of quality asset classes and investment types, success isn’t tied to one company or one type of investment. While diversification cannot guarantee a profit or protect against loss, it can help smooth out the ups and downs of the markets, providing the potential for a better long-term experience.

Financial experts recommend reviewing your portfolio with your financial advisor at least once a year to ensure it’s adequately diversified. Your financial advisor can also help you decide if a recent major lifestyle or goal change warrants a change to your strategy.

5. Focusing on the short term

Day-to-day fluctuations in an investment’s value may tempt some investors away from their long-term strategy. For example, some investors sold out in 2008 because their portfolio had fallen from an all-time high, even though their performance may still have been on track to meet their goals and well above where they initially started.

Decisions can also be influenced by how a situation is presented.

Take this example: “The Dow plummets 150 points” OR “the Dow declines 1%.” Both could describe the same situation, but the first sounds much worse. It’s these short-term movements, and how they’re presented by the financial entertainment media, that could lead you to make emotional short-term decisions.

6. Setting realistic expectations

Realizing that market declines, while unpleasant, are normal will help you set your own realistic expectations for investment performance. After all, the stock market averages one 10% correction every year, and over a 25-year retirement, you could experience an average of six to seven bear markets.

It’s important to measure performance as progress toward your long-term goals, not in day-to-day fluctuations. Your financial advisor can help you answer the question, “How am I doing?” and help provide the discipline you’ll need to stick with your long-term strategy and ignore short-term distractions.

Source: https://www.edwardjones.com/preparing-for-your-future/financial-education-resources/investing-emotions.html

Managing Credit

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Credit is the cornerstone of financial life in the United States, and if you’re starting from scratch, your first step will be establishing your credit history. This means opening or getting added to an account, often a loan or credit card.

As you start building credit, your financial goals may go beyond simply building credit or getting a credit score. Good or excellent scores can help you qualify for the best offers and not get held back by a lack of credit.

  • Understanding what helps—and hurts—your credit score is important when deciding how to use credit and how much debt to take on.
  • The best way to maintain good credit is to borrow responsibly and always make payments on time.

Credit and debt are right at the top of the list of money management concerns and building wealth. Here are 10 common credit facts that can lead to financial well-being:

1)  A credit score is important when you need to borrow money and other areas.

Your credit score is a big part of your financial identity. It can be the most important factor in determining whether you can get a loan and how much it’ll cost you. Your credit score impacts your ability to borrow, and it can affect many other areas of your life, including:

  • Interest rates—Whether you’re looking to finance a home, a car or a washer and dryer, the better your credit score, the lower the interest rate you may be offered.
  • Renting a new home—A prospective landlord can run a credit check to see if you’re a good risk. Things like late payments and collections not only lower your score, they can be a deal breaker when it comes to renting.
  • Insurance premiums—In some states, insurance companies use credit-based insurance scores to determine your premiums. A poor credit score can increase your costs for home and auto insurance.
  • Job prospects—More and more companies use your credit history when screening for jobs. This can impact your ability to get—and keep—a job, as well as your eligibility for a promotion.
  • Security clearance or military deployment—For federal workers in national security positions including members of the military, late payments, collections, bounced checks, large debts or credit report errors can upend your career, jeopardizing deployment or a promotion.

2) Carrying a high balance does not helps build credit faster.

The only thing carrying a credit card balance builds is your interest payment—and the total cost of what you financed. To build credit, it’s much better to pay off what you charge each month and never carry a balance.

3) As long as you don’t go over your credit card limit you’re fine.

To improve your credit score it’s best to use less than 30 percent of your credit line to keep your “debt utilization” rate low. Debt utilization is the amount you borrow relative to the amount you’re able to borrow. A high utilization rate—or even an increase in the amount of credit you’re using—can flag you as a higher risk, lower your credit score and raise your interest rate.

4) Closing out credit cards will not improve your score.

Closing cards decreases your available credit and increases your debt utilization ratio, making it look like you’re borrowing at a higher percentage. Second, closing cards can reduce the average age of your accounts, making you seem like a newer borrower, which can lower your score.

However, closing a credit card can help you manage spending and protect you from identity theft if you’re not using the account. If you decide to close a card, you may want to adjust your spending or pay down existing balances at the same time to keep your debt utilization ratio steady.

5) Getting married does not merges your credit history.

Your credit histories always remain separate, unless there’s a joint account or authorized user. In that case, there’s a shared history, and you’re jointly liable for any charges. If you’re divorced or separated, a joint account still means joint liability, and any new or unpaid debts can affect your credit score. I suggest every couple openly discuss their attitudes toward credit and debt early in their relationship.

6) You can pay a company to quickly remove bad credit marks from your history. 

Accurate negative credit information can stay on your credit report for up to seven years. Bankruptcies can stay on your report for up to ten years. In fact, no one can remove negative information such as late payments from a credit report if it’s accurate, no matter what a credit “repair” company promises you. Use caution before signing up with any company that offers credit repair or counseling services.

7) Checking your credit report will negatively impact your score.

Absolutely not. You’re entitled to receive a free credit report annually from each of the three major credit rating bureaus (Equifax, Experian, Transunion), and I highly recommend getting them. Just go to annualcreditreport.com.

8) There are multiple credit scores.

There are quite a few credit scores, and different rating agencies often have more than one. You can even have different credit scores from the same agency because scores are calculated at different times and according to different criteria. For instance, FICO recently made changes to its criteria, which I discussed in a previous column. 

The important thing for consumers to understand is what basic factors go into a credit score: payment history, unpaid debts, age of accounts, debt utilization ratio, new credit applications and types of credit.

9) Shopping for credit will not hurt your credit score.

It depends on how you shop, the type of credit you’re shopping for and your timeline. For instance, applying for multiple credit cards within a short time can have a bigger negative impact on your credit score than shopping for a home or auto loan. In general, comparison-shopping within 14 to 45 days for an auto loan or mortgage is considered a single inquiry. But trying for a mortgage and a car loan at the same time could have a negative impact.

That said, it makes sense to shop around. To minimize any negative impact, pull your credit report in advance to check for errors, and concentrate your rate shopping into a short amount of time.

10) Having more credit cards does not improve your credit score.

Having multiple credit cards can improve your credit history. But it can also tempt you to spend more and be late on payments, which would lower your score.

Ultimately, the best way to improve your credit is to borrow responsibly. Understand these myths and you won’t be fooled into taking on too much debt—a financial prank to avoid any time of year.

Reference:

  1. https://www.creditkarma.com/advice/i/how-to-build-credit-from-scratch
  2. https://www.schwab.com/resource-center/insights/content/money-myths-10-ways-we-fool-ourselves-about-managing-credit
  3. https://www.creditkarma.com/advice/i/how-to-build-credit-from-scratch#Next-steps-build-excellent-credit
  4. https://bettermoneyhabits.bankofamerica.com/en/taxes-income/understanding-tax-terms

Retirement Readiness and Cash Flow

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Building wealth is essential to accomplish a variety of goals like retiring in lifestyle you desire.

Retirement Comes First

It can be tempting to put your saving and investing for retirement on the back burner by paying for your child’s college education, helping your adult children with living expenses, or paying for a wedding. But it is incredibly important that you prioritize and put your retirement savings first. While loans are available for things like college education and home improvement, there are no loans or money growing on trees to finance your long-term retirement.

Dipping into your retirement tax deferred accounts can be equally tempting — such as cashing out your 401(k) when you leave a job or tapping it if you’re strapped for funds. You might also think about withdrawing funds as soon as the early withdrawal penalty disappears at age 59½.

Think twice! Even without early withdrawal penalties, federal and state income taxes can eat up a big chunk of what you withdraw, and you will lose all the possible growth of that money over the long term.

When you retire matters

Make sure you, your partner and your adult children are on the same page regarding your retirement timing and your financial planning. Sit down and have a conversation with your family about your changing priorities and goals as you near retirement.

“During Americans early years in retirement, many retirees end up spending as much as or more than they did when they were working,” says Jennipher Lommen, a certified financial planner in Santa Cruz, Calif. And, when and at what age you decide to retire matters greatly. If you retire before age 65, you’ll need to pay more for your health care before you’re eligible for Medicare benefits.

What is your retirement number

When it comes to retirement, it’s what you spend and your cash flow that matters most. Base your retirement needs and number on 100% of your pre-retirement expenses — plus 10%.

A rule of thumb to retirement savings states that you’ll need to save about 20x your gross annual income to retire. In other words, if you earn $50,000 per year, you’ll need $1,000,000 to retire. This is a good rule of thumb, however, it is expenses are what matter.

To come up with your own number for income (or cash flow requirement to cover your expenses) during retirement, you need to figure out how much you’ll actually spend in retirement, which means coming up with a comprehensive retirement budget. Only then can you determine whether your savings, pensions and other sources of retirement income are sufficient to finance the lifestyle you’ve envision.

The wealthy, according to Thomas J. Stanley, author of the best selling book, “The Millionaire Next Door,” have several financial habits in common when it comes to spending, saving, investing and accumulating wealth. One key commonality: They started early saving, investing and building wealth when they were young.

Give some serious thought to how you’ll spend your time—and money—once you stop working. The first few years of retirement are often referred to as the “go-go years”. It’s the period when many retirees are still in relatively good health and eager to do all of the activities they didn’t have time to do when they were working.

Retirees “always spend more on travel and entertainment than they thought or projected that they would,” says Jorie Johnson, a CFP in Brielle, N.J.

Creating a budget and sticking to it positions you for success since it creates a job for your dollars. “A common misconception is that budgeting is only for people who are struggling to make ends meet,” says James Kinney, a CFP in Bridgewater, N.J. “A household will feel wealthier and be better able to achieve its goals if it plans and monitors spending.”

If the word budget turns you off, “think of it as a spending plan,” says Lauren Zangardi Haynes, a CFP in Richmond, Va. “You choose where to allocate your monthly spending in line with what’s important to you.”

Get Organized

It’s not unusual for one partner to take sole responsibility for managing finances. However, when you’re married, planning your retirement needs to be a dual effort. Make sure each person is aware of financial plans and cash flow requirements, since both will be affected by the decisions that have been made.

It’s essential to organize your financial records. Work together with your spouse to gather records for each: bank account, credit card, retirement account, insurance policy, loan, mortgage, or other property (like cars). By the end of this exercise, you should both understand what assets you have and what debts you owe.

Many assets — like retirement plans, banking accounts, investment accounts, and insurance proceeds — let you name a beneficiary who will immediately become the owner of that asset when you pass away. The more assets you can transfer to beneficiaries, the fewer assets you’ll need to send through probate*, and the more effectively you can care for your life partner and family in the event of your or your spouse’s unexpected death.

But for all of this to work, you must make sure that your beneficiary designations are up to date. Assets that transfer directly to a beneficiary when you die are said to “pass outside” or “pass over” your Will.

Update your beneficiary designations:

  1. Go to your bank and ask to set up a POD, or Payable-On-Death, designation for any accounts that are held solely in your name. Joint accounts will automatically pass to the survivor listed on the account.
  2. Check the beneficiary designation for any of your retirement accounts.
  3. Do it today

Your vision for retirement is unique to you and your spouse.  The role of money in retirement is to provide security and freedom. Over half of retirees wish they had budgeted more for unexpected expenses, according to Edward Jones. So, don’t delay and start planning and preparing for retirement today.

References:

  1. https://www.kiplinger.com/slideshow/retirement/t047-s002-make-sure-you-have-enough-money-in-retirement/index.html
  2. https://www.kiplinger.com/slideshow/saving/t037-s003-money-smart-ways-to-build-your-wealth/index.html
  3. https://www.edwardjones.com/us-en/market-news-insights/retirement/new-retirement